OPEC deal boosts struggling African economies

OPEC deal boosts struggling African economies

Oil analysts have welcomed OPEC’s decision to limit global oil supply as a step towards boosting Africa’s precarious finances. The supply cut, the first agreed by the cartel in eight years, imposes limits on some of the world’s biggest oil producers while sparing key African extractors Nigeria and Libya.

Crude prices spiked to $50 a barrel in the aftermath of the decision, up by over 8%. The result is particularly welcoming for Nigeria, whose economy has been hit hard by low oil prices. The country successfully argued that it should be spared cuts owing to its sustained economic crisis and a renewed upsurge of militancy in the oil heartlands of the Niger Delta, which has lowered production capacity.

Instead, the burden of cuts will fall on the largest Middle East producers, but other African countries will contribute towards the agreement, including Angola, which will shed 87,000 barrels per day (bpd) and Algeria, which will cut 50,000 bpd. Meanwhile, Gabon will lose 9,000 bpd. Analysts say that the agreement, intended to shave 1.2m bpd off global production, should provide economic relief for African producers whose public finances have been crippled by the sustained low global oil prices.

“It’s positive news for African countries, OPEC has shown itself to be a responsive organisation,” said Damilola Olawuyi, director of Nigeria’s Institute for Oil, Gas, Energy, Environment and Sustainable Development.“It’s particularly positive news for Nigeria […] a boost to the economy of Nigeria is a boost to the economy of many West African countries and the outlook in general,” he added.

Reacting to the news of Nigeria’s exemption, Lauretta Onochie, a prominent member of the ruling All Progressive Congress (APC) political party said on Twitter:

The supply glut had long been fiercely criticised by African OPEC members, who have railed against their limited influence on the cartel. According to data from late 2015, OPEC’s four African members – Algeria, Angola, Libya and Nigeria – together account for just 8.8% of OPEC’s proven reserves, giving them a minor voice in supply decisions. In February, Nigerian president Muhammadu Buhari slammed the organisation for engineering “unsustainable and totally unacceptable” oil prices. Analysts believe that the decision is likely to ease those tensions and could re-establish OPEC’s waning credibility among African members.

“I expect it would ease the tension for two reasons: first, OPEC are trying to boost the price which helps all producers, and second, because Nigeria has been excluded [from the cuts] so they will be happy,” said Spencer Welch, oil markets and downstream director at IHS Markit.

Yet Welch says that African countries will have an important role to play in ensuring that the deal is able to hold, while future attempts to boost production will have to be carefully managed. “The fundamental question in all this is what happens if Nigeria and Libya are able to restore some production,” he said. “Who is going to make up the extra cut that would be required to stay within the 32.5m bpd limit and would this break the deal?”

Meanwhile, the credibility of some OPEC members remains an issue of contention, according to Alfa Energy chairman John Hall, an OPEC expert. “The real issue here is that few OPEC Members can be trusted to stick to any such agreement and may well infringe on output,” he said.

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